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Deutsche Bank Trading Lags But FICC Could Be Entering Sweet Spot

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Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) (ETR:DBK)’s 1Q14 results witnessed strong FICC revenues relative to peers, though the market is overly negative on the prospects of FICC, notes Jefferies analyst.

Analyzing Deutsche’s recent results, Omar Fall of Jefferies in the research report dated April 29, 2014 points out that the bank’s performance in other divisions was mixed.

FICC could be entering sweet spot

In the February research report, Jefferies analysts pointed out FICC business could be entering a cyclical sweet spot over the next two years aided by rates and credit business. The analysts pointed out that rates revenues are positively correlated to a steeper yield curve and should recover as the path of central bank action clears. The analysts pointed out that there was a broad consensus expectation of a steepening US yield curve over the next two years as the Fed tapers its bond buying program, while fixing short term rates.

Considering both consensus earnings estimates and valuations depressed by FICC exposure, the Jefferies analysts anticipated significant upside to Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) (ETR:DBK) and Credit Suisse Group AG (ADR) (NYSE:CS). The analysts had assigned a Buy rating on both the firms with target price pegged at €45 and CHF 34 respectively.

Strikingly strong good results from FICC

The Jefferies analyst in the today’s report point out Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) (ETR:DBK)’s CB&S PBT of €1,492 m was 24% ahead of consensus aided by strikingly good FICC results, down only 10% yoy, which is the best performance of the peer group. The analyst points out that if one includes the now non-core commodities business, revenues were down 16% yoy. Though credit did benefit from some un-quantified distressed debt gains-on-sale, credit were up yoy. While equities were also solid up 1% yoy, origination and advisory were down 7% yoy.

The analyst, however points out performance in other segments were mixed, with Global Transaction Banking PBT was 18% ahead of consensus, while Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) (ETR:DBK)’s Asset & Wealth Management was 35% below.

Leverage – Greater issue for Deutsche Bank

The Jefferies analyst points out on capital, CET1 of 9.5% was down 20 bp QoQ due to model updates and RwA inflation, which is unhelpful. The analyst believes leverage is the greater issue for Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) (ETR:DBK) and at 3.2% this was up 10 bp QoQ.

The analysts notes Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) (ETR:DBK) are implicitly now targeting c. €1.4trn 2015 leverage exposure, vs. previous target of c. €1.5trn.

Despite the market is overly negative on the prospects for FICC, the Jefferies analyst remains buyer of Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) (ETR:DBK) and pegged the target price at EUR 45.1.

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